Subsidy FAQs

Commonly Asked Questions About Subsidies

Are all subsidies bad?

Subsidization occurs whenever the government uses its power to redistribute wealth or access. Provision of subsidized health care, food, or other basic needs for the poor is certainly a subsidy. However, the provision of such services has a strong moral justification and virtually no environmental side-effects. These are clearly of good subsidies, at least in intent (as the structure may not adequately support the noble goal).

Yet, beneficiaries of all types of subsidies inevitably extol the virtues of the particular program they get funding/support from. A certain degree of skepticism is needed. Even when the poor do receive some government support, access to subsidies is often a function more of political power than of true need. As a result, a disproportionate share of support flows either to wealthy individuals or to powerful corporate interests. This can magnify disparities between rich and poor, and often slows the evolution and development of new industries (which may be much more environmentally sound than the status quo). When these subsidies are both expensive and not well targeted, substantial public resources are diverted from programs that could be of great benefit to the truly poor in society.

Why do subsidies matter?

Subsidies matter for two basic reasons. First, they divert resources to favored activities, industries, or people based on political objectives. These objectives may have to do with political power, needs to "buy-off" particular groups, or unrealistic assessments of available technologies, rather than from any desire to achieve social goals such as welfare or education. Second, subsidies mask the relative price of different goods and services. In energy, for example, heavily subsidized electrical transmission can mean that the much higher price of electricity in rural areas is obscured. As a result, important entry points for alternative energy sources -- such as where off-grid renewables cost less than the combined cost of conventional power generation plus distribution -- are lost. In most countries, there are hundreds or thousands of subsidy policies that have been implemented incrementally over decades. In combination, these policies make it extremely difficult to see the true underlying market dynamics associated with alternative products or services. All too often, the existing subsidies also work counter to the missions of other parts of the government -- for example in terms of environmental protection.

How big are subsidies?

Since government subsidies technically result from any transfer of public tax funds to narrower private interests, one metric of gross subsidization is the government share of gross domestic product, which ranges as high as 40 or 50 percent of gross domestic product (GDP) in some countries. This measure is not particularly helpful for two reasons. First, public spending in a particular year represents only a small portion of the influence governments have over private economic conditions. Subsidized credit and insurance programs, as well as regulatory loopholes, mean that the distortionary impact of subsidization can be many times higher than the government share of GDP. Working in the opposite direction, however, is the fact that not all subsidization causes social problems. Subsidies that harm human health or the environment are often classified as "perverse subsidies." This definition would include policies that subsidize environmentally-intensive or destructive sectors such as energy, mining, farming, fishing, timber, transport, and construction. There are no systematic measures of how big perverse subsidies are globally, but rough estimates suggest they easily run into the hundreds of billions of dollars per year.